As part of our recent Legal Pricing Roundtables, we reviewed the key market challenges and the likely trends for the year ahead. A theme which emerged loud and clear is the ‘double whammy’ of rising inflation (impacting everything from office space to utilities) and rapidly increasing salary costs for associates within many law firms as the war for talent intensifies.

Several firms we spoke with have already begun to assess the detrimental impact these rises in cost are having to their respective firms, with a negative impact on profitability of anywhere between 10 and 15% frequently being mentioned.

This reality needs to be balanced with increasing partner expectation after the strong performance of many firms during 2021.

Indeed, as one recent article highlighted that ‘law firm partners remain bullish about 2022’ and Gretta Rusanow, managing director and head of client advisory services at Citi Private Bank Law Firm Group, said firm partners are now measuring themselves against their tremendous performances of last year.

So, what can we do to help our firms stay ahead of the curve and manage our internal clients’ (the partners) expectations of firm-wide and matter-specific profitability?

A number of firms – as evidenced by a quick poll we did during the Roundtable – have already begun to have conversations with their clients about passing some element of these cost increases on.

However, is this the right approach?

Firstly, focus on what’s in your immediate control:

  • Look for ways to adopt more value-based or non-hourly fee approaches with your clients to remove the focus on hourly rates;
  • Look for ways to better recover on scope variations, through more regular client communication and better internal matter management and reporting practices; and,
  • Continue to adopt those strong practices already established during the pandemic on cash management, via more regular billing, better time capture, and better management of WIP.

Better realization of your firm’s current rates on matters will help mitigate the potential level of increase immediately required – and many of these approaches are good practice and what our firms should be seeking to implement regardless of the current market situation.

When embarking on having rate increase conversations with your firm’s clients, remember some of pre-requisites for having productive client conversations on this theme:

  • Identify who at the client you should speak with and give them advanced warning of the discussion;
  • Have the conversations from a position of ‘strength’ – in other words, where you are able to clearly demonstrate the value you are adding to your client, and how any increases need to be viewed as being fair and proportionate;
  • Be strategic in where you are seeking rate increases – recognise that not ‘one of the size fits all’. Tailoring your approach to rate increases is important at this time (indeed, this is good practice at any time, especially when approaching the annual rate increase season); and,
  • Provide compelling evidence of why these targeted increases are necessary (for example, only apply increases to certain key timekeepers, experience levels and/ or practice areas) and discuss approaches to help minimise the impact to them as clients.

In a worst-case scenario, for those clients who are unwilling to discuss any rate increases, take the opportunity to assess whether these clients are still important to the firm and if not, how these may be transitioned out and other, more appropriate clients, may be engaged.

And finally, remember that any fee agreed should not only fair be to your client, but also fair to you and your firm.

Take time to work out whether the proposed commercial arrangements will fulfil the firm’s objectives both now and in the longer-term.

You’re welcome to join us at the next Roundtable – click here to learn more.

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